Ai Group - Australian Industry Group

Australian PCI®: Construction falls at steeper rate in April

Ai Group Head of Policy, Peter Burn, said: 'The downturn in the overall construction industry worsened in April as the Australian PCI® dropped to 42.6 points in the month. The housing and apartment sectors both remain firmly in negative territory and commercial construction recorded a ninth month of contraction. Weakness in these sectors was partially offset by an expansion in engineering construction in line with reports of more planned infrastructure projects moving into the construction phase. Although engineering construction is likely to remain an area of relative strength for the industry on the back of spending on large-scale, long-term publicly funded infrastructure projects, there is little sign of any near-term improvement in overall industry conditions. Highlighting this, employment fell further in April and at a rate that was the steepest in almost six years. There are now strong signs that adverse conditions in the broader construction industry are flowing through to sections of the services and manufacturing sectors,' Dr Burn said.

HIA Economist, Tom Devitt, said: 'The home building industry remains in a delicate position. Tighter lending conditions and weak consumer confidence, due to falling house prices, continue to constrain the market. The home building pipeline is shrinking as the number of new home approvals slows. As this pipeline of building work slows back to a new steady state, there will be an impact on employment in the building sector. Public infrastructure investments, strong population growth and low levels of unemployment will be crucial to supporting activity in the wider economy and preventing a more significant decline in home building activity. The slowing in the cost of building materials will need to continue as new home builders are facing tighter margins, as they compete for sales in a market where the price of established houses is falling,' Mr Devitt said.

Australian PCI® - Key Findings for April:

The activity index in the Australian PCI®continued to contract in April (down 4.5 points to 41.6), while new orders also fell for an eighth consecutive month (down 0.1 points to 44.4). This was associated with a continued decline in deliveries from suppliers (up 0.6 points to 46.4) and a further drop in employment (down 6.9 points to 39.2 - its steepest rate of decline since May 2013).

Three of the four construction sectors in the Australian PCI® continued to contract in April (see table below), with only engineering construction expanding at a mildly positive rate (up 1.8 points to 51.4). Apartment building was again the weakest performing sector (up 1.8 points to 33.4), while house building also remained firmly in negative territory (up 0.1 point to 36.4).

While the input prices index moderated somewhat in April (down 2.0 points to 61.7), cost pressures in the delivery of construction projects remain a concern due to elevated energy costs and relatively high prices for commodities and imported construction materials. Growth in wages also continued, if at a slower pace (down 3.5 points to 55.7).

The selling prices index continued to contract in April, and at its steepest rate in six years (down 9.6 points to 31.8). The widening gap between the input and selling prices indices demonstrates that profit margins continue to be squeezed for businesses in the construction industry.

Background: The Ai Group/HIA Australian PCI® is a seasonally adjusted national composite index based on the diffusion indexes for activity, orders/new business, deliveries and employment with varying weights. An Australian PCI® reading above 50 points indicates that construction activity is generally expanding; below 50, that it is declining. The distance from 50 is indicative of the strength of the expansion or decline.